Posted by: Josh Lehner | June 4, 2020

Economic Disparities, an Ongoing Discussion

The world is data rich these days. One of our office’s roles is to bring to life this data to better understand, and better explain what is happening. Not everything our office does is directly tied to the revenue forecast, even as it does further our understanding and ability to communicate with policymakers and the public. The key as a researcher is to always peel the onion. There are new layers to uncover and examine. Good analysis should always lead to more questions.

Our office tries to look beyond the headline economic data to see what it means in terms of the daily life of Oregonians. We typically analyze and think through the implications when it comes to different regions of the data, for workers in different industries or occupations, or by their level of educational attainment. In recent years we have taken a few steps — not a lot, but a few — to further explore the changes seen for different racial or ethnic groups in the state. We need to do better. We will do better and are working to incorporate a regular section in our forecast document that adds this additional lens through which to examine the latest socio-economic data.

The key is we know that economic gains do not accrue equally. There are some segments of our society that truly only benefit during tight labor markets and full employment. As the economy strengthened in recent years, we saw better job and income growth in rural Oregon, among those without a high school diploma, those with criminal records or self-reported disabilities, and certainly among our communities of color. Even with these gains, there remains large gaps, or disparities when it comes to socio-economic opportunities and outcomes.

Previously our office looked at household income and employment in addition to poverty rates for different racial and ethnic groups in Oregon. Below is an updated look at one of economists’ favorite metrics: prime-age EPOP. This is the share of prime working-age Oregonians (25-54 years old) who have a job. Even as the differences finally began to narrow some in recent years, it is quite clear there is a sizable, persistent gap over time.

A few notes. First, the way Census asked about and categorized residents by their race and ethnicity has changed over the decades, e.g. you used to be only able to choose one race, now you can choose multiple races or ethnicities.

Second, more historical data exists than is shown here, but Oregon’s black population was extremely small prior to WWII. For example, in the 1940 Census there were about 2,600 black Oregonians, of which 600 were prime working-age men. It is hard to draw many conclusions from the data given such a small population, even as you can draw conclusions about our state’s history.

Third, highlighting and exploring the data is one thing. However explaining the differences can be more difficult, or more uncomfortable to discuss. Now, there are some underlying reasons why these gaps or disparities emerge. Research finds that differences in individuals’ work experience, the occupations they enter into, and their level of educational attainment all drive some of the topline differences in employment, poverty, and income. However these factors never explain all of the differences. The portions unexplained by standard data in the models is generally considered to be due to harder to measure things like broader societal factors or outright discrimination. And these factors also drive some of the other data used to explain the differences to begin with.

Finally, as an example of peeling the onion, and some of the research our office will be incorporating into our forecast documents moving forward, the last couple of graphs dig a little bit into differences in educational attainment among black Oregonians and the statewide figures. As seen below, educational attainment is rising in recent decades for all Oregonians. These gains are relatively consistent across different racial or ethnic groups. However it is clear that black Oregonians earn college degrees at a lower rate than their statewide, mainly white non-Hispanic, peers.

So where does this gap come from? Well, it’s about 50/50 in terms of the share not graduating from high school, and the share that attends college but does not finish a degree. The share of the population with the other levels of educational attainment — a high school diploma, an Associate’s degree or an advanced degree — are all equal.

And of course the reasons this type of analysis and socio-economic outcomes matter is at least twofold. First, it matters in the everyday life of Oregonians in terms of how they live and work. Second, it also matters for future economic and revenue growth for the state. Our office focuses a lot on migration, industrial structure, different forms of capital and productivity, because those all drive future economic gains. Being able to talk through the implications and differences across the state geographically, for different industries and occupations, and for different segments of the population is important. So stay tuned for more consistent research from our office along these lines, where we continue to peel the onion in hopes of better understanding the Oregon economy.

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Posted by: Josh Lehner | May 28, 2020

COVID-19 Regional Outlook

Last week our office released the latest economic and revenue forecast for the state. The outlook isn’t pretty as we face years of high unemployment and reduced revenues for public services. Included in the forecast document was a section where we dig into the industry mix and regions of the state. We try to examine the implications for the local outlook and how they vary around the state.

But first, our friends over at the Oregon Employment Department released county level employment data yesterday for April. This is our first hard look at the data, even if they are preliminary estimates that will be revised in the months ahead. As expected, no county went unscathed. Job losses ranged from sizable to tragic. We already knew that job losses so far in the state were the deepest on record, and in the chart below, it is clear that the vast majority of counties are seeing job losses that are larger than experienced during the Great Recession. (Next week we’ll dig further into why our office believes this cycle will be shorter, and the recovery faster than last time, but for now, the initial severity of the recession is certainty worse.)

Given that social distancing impacted consumer services to a larger degree, regional economies in the state that rely more upon these industries have been hit harder to date. Places like the North Coast, Central Oregon and parts of the Gorge all have a larger tourism-dependent economy. These areas of the state have seen the largest job losses (above) and the largest increases in the number of initial claims for unemployment insurance (below). While all sectors and regions of the state are seeing a recession, the severity, at least initially is not uniform.

In recent years our office has spent a lot of time digging into long-run sources of growth, and the main reasons why Oregon’s economy is more volatile than the U.S. We have discussed the state’s industrial structure, how these structures have evolved at the regional level, and how they play into regional volatility. Additionally, we highlighted the importance of both labor force growth, and productivity gains through the local lens. All of this work was designed with an eye toward some unknown future recession and recovery. Well, it’s here now. For those interested in reading more, please refer to the links above. What follows below is based on what we included in our forecast document last week.

In that forecast document our office tried to look forward and see how regional economic structures could impact future growth. We mapped our statewide forecasts by sector to each region. The findings show some areas may be better primed for growth from an industrial structure perspective, while others are more likely to face future headwinds.

One key long-run driver of growth is professional and business services, and office-based work more broadly, which tends to be concentrated in metro areas. As such, the Portland region, the Willamette Valley and Central Oregon are best suited to see stronger gains due to their strengths in these sectors. Among rural counties, Coos, Douglas and Klamath all have concentrations in professional and business services twice that of rural Oregon overall. This should bode well for future growth.

Conversely, regions that may face headwinds due to their industrial structures differ for the reasons why. While the North Coast is hard-hit today due to their exposure to leisure and hospitality, this is not a long-run headwind. Our office fully expects travel, tourism, and going out to eat to essentially recovery fully in the years ahead. Really it is the lack of professional and business services that is weighing on the projected growth in the North Coast in the coming years. The North Coast does not necessarily face longer-run headwinds, rather it lacks industrial tailwinds.

On the other hand, Northeastern Oregon is expected to grow slower due to its reliance on natural resources (ag) and manufacturing, both of which are likely to see slower growth and more permanent damage than other industries due to the recession. (During our presentation to the Legislature, this topic came up. The concentration among natural resources and manufacturing have been historic strengths for the region. For example last cycle, high wheat prices aided the recovery in eastern Oregon. However today commodity prices are low due to the global recession. Additionally, Representative Owens pointed out that while beef prices are high today, that revenue is flowing to the packers and processors and not the ranchers.)

Among urban counties that are expected to see slower gains from an industrial perspective both Linn and Yamhill similarly have a high concentration in goods-producing sectors which are expected to grow slower over the decade ahead. The Rogue Valley (Jackson and Josephine) has a large concentration in essentially all segments of retail that will likely weigh on growth moving forward.

Of course mapping local industrial structures to statewide trends is not perfect, even if it provides one way to gauge potential strengths and weaknesses.

As discussed in-depth in our March 2020 forecast, and included in the links above, long-run growth is determined by labor and capital. What the really means is it is all about the number of workers an economy has and how productive each worker is. As such, key issues to watch are migration trends and changes in the working-age population. Additionally productivity gains can come from many different types of capital, such as financial, natural, physical, human, and/or social.

Looking forward, all of the different types of capital and labor force gains can help drive future economic growth. If a regional economy lacks one source, it is not a deathblow to overall growth. Rather it signals the area must rely on other types or avenues for growth. Finally, even as the mix between, say, natural and human capital plays out strongly in our office’s statewide forecast, keep in mind that one source of growth is not inherently better than the others.

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Posted by: Josh Lehner | May 27, 2020

COVID-19 Alternative Scenarios

Last week our office released the latest economic and revenue forecast for the state. The outlook isn’t pretty. The economy faces years of high unemployment which directly translates into reduced revenues for public services. While the baseline forecast is our outlook for the most likely path of the Oregon economy, many other scenarios are possible. Given the uncertainty about the path of the virus and public health, the range of potential outcomes is larger than usual.

I have seen commentary arguing our health assumptions are either too optimistic or too pessimistic. Some of the time when getting criticized in both directions it indicates you did a good job, however some of the time it means you just plain messed up. We shall see.

As always, our office did include a couple alternative scenarios in the forecast last week. These are not designed to be the absolute upper and lower bounds on the potential outcomes. These scenarios are modeled on realistic assumptions of a stronger, faster recovery due to medical treatments becoming available sooner than the baseline, and also the real possibility of a double-dip recession with a longer, slower recovery.

Optimistic Scenario – A Faster Recovery:

The initial severity of the recession is not as deep as under the baseline with the unemployment rate peaking at 18 percent instead of 23 percent. The overall economic recovery is considerably faster primarily due to the accelerated timeline for the development and widespread availability of a vaccine or medical treatment. As the public health situation improves, business and consumer confidence returns to a greater degree, strengthening the economic recovery. Overall the amount of permanent damage done during the shutdown phase is minimal. Personal income is 3-4 percent higher than the baseline, largely driven by stronger employment and wage gains. Even so, the economy does not fully recover until late 2022. What took 3 weeks to break, takes 30 months to put back together. Under the faster recovery scenario, General Fund revenues would be around $500 million higher in both the 2019-21 and 2021-23 biennia.

Pessimistic Scenario – A Double-Dip Recession:

There are two main channels through which a double-dip recession could occur. The first is through a second wave of cases surging this fall resulting in another round of strict social distancing. The resurgence in cases may be due to a seasonal component of the virus, an economy that reopens too soon, or people simply ignoring the ongoing public health guidelines. The second channel is more economic in nature. As the federal assistance programs like the PPP and expanded UI expire over the summer months, it leads to another round of layoffs and closures as firms struggle to stay afloat amidst a weak economy and lower levels of consumer demand.

Regardless of the exact reason, the recession is deeper and more prolonged. The unemployment rate remains above 20 percent for nearly two years and personal income is 7 percent lower than the baseline though the middle of the decade. Overall Oregon’s recovery is slower and the economy does not fully return to health until late 2027. This would put it on the same timeline and trajectory as the aftermath of the Great Recession and the early 1980s recession. Under the double-dip recession scenario, General Fund revenues would be nearly $700 million lower in 2019-21 and nearly $1.4 billion lower in 2021-23.

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Posted by: Josh Lehner | May 20, 2020

Oregon Economic and Revenue Forecast, June 2020

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

While the Covid-19 outbreak has injected a great deal of uncertainty into the outlook, the nature of our forecast is unchanged. As always, the June 2020 economic and revenue forecast represents what the Office of Economic Analysis and its advisors believe is the most probable outcome given available information. Although actual economic growth and state revenues may depart significantly from these projections, we aim to build a forecast that is just as likely to end up too high as it is too low.

Forecast errors on both the high and low side create problems for decision makers. In a recessionary environment, a revenue forecast that is too low may lead to cuts in public programs that are unnecessarily deep. If the revenue forecast proves to be too optimistic, the budget will need to be rebalanced when the truth eventually comes out.  Rebalancing becomes increasingly difficult as we approach the end of a budget period, given that much of the allocated resources have already been spent.

In one sense, the sudden stop of economic activity due to the outbreak of Covid-19 has made the revenue outlook clearer.  Economists have a particularly difficult time forecasting turning points in the business cycle.  This time around, it became clear overnight that Oregon is in recession and that the downturn will be severe. Recovery will take years.

As social distancing restrictions continue to lift in the months ahead, underlying economic activity will return. Pent-up demand will transition the economy from recession to recovery as households are able to venture out to a larger degree. This rebound in consumer spending, business sales, and profits will lead to firms hiring back some employees. Economic growth in the second half of this year will be strong. However this initial bounce back will be far from complete.

After this rebound in economic activity, growth will continue but at a relatively slow pace due to the uncertainty surrounding public health. Firms and households are expected to remain somewhat hesitant and only gradually test the waters. Once business and consumer confidence fully return following available medical treatment or the passing of the pandemic, stronger economic growth will resume and the economy will fully recover.

While this recession is extremely severe – the deepest on record in Oregon with data going back to 1939 – it is expected to be shorter in duration than the Great Recession. The economy should return to health by mid-decade. The reasons for the faster recovery include the fact that there were no major macroeconomic issues or imbalances prior to the virus, much of the initial severity of the recession is due to suppressed economic activity, and the federal policy response, however imperfect, has been swifter and more targeted than in recent cycles.

Combined, these factors should help limit the amount of permanent damage done to the economy during the shutdown phase. Should the number of firms that close, or the number of workers displaced remain relatively limited, or rather the amount of time they spend as such be limited, then the overall economic recovery timeline should be shorter than last decade.

How severe will the revenue slowdown be?  During most business cycles, Oregon’s state revenues have proven to be more volatile than those in the typical state. Not only is Oregon’s underlying economy subject to boom-bust swings, but the state also depends on a very volatile mix of revenue instruments, led by personal and corporate income taxes.

During the current recession, income taxes might not fare so poorly in comparison to other revenue instruments. Given the depth and breadth of the current economic downturn, no state revenue system will be spared from pain going forward.  The need for isolation has led to spending declines that far outstrip what is usually seen during recessions, hitting sales tax states disproportionately hard.  States that depend on tourism and energy/mining revenues are also in for a tough year or two.

Oregon will share some of the pain felt by sales tax states since our revenue system has become much more dependent on consumer and business spending over time.  Even before the corporate activity tax was enacted in 2019, a wide range of sales-based taxes had been expanded in recent years.  Taxes on lodging, gasoline, vehicle purchases, video lottery and marijuana sales are all much more substantial than they were during the last recession.

While some taxes will fare better than others, all major revenue sources will face considerable downward pressure given the severity of the recession.  The sudden stop in economic activity has led to the largest downward revision to the quarterly forecast that our office has ever had to make. In the baseline (most likely) scenario, General Fund and other major revenues have been reduced relative to the March forecast by $2.7 billion in the current biennium and $4.4 billion in the 2021-23 budget period.

Fortunately, Oregon is better positioned than ever before to weather a revenue downturn.  Automatic deposits into the Rainy Day Fund and Education Stability Fund have added up over the decade-long economic expansion, and stood at $1.6 billion in April. In addition to dedicated reserve funds, the General Fund had over one billion dollars in projected balances before the recession hit.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

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Posted by: Josh Lehner | May 19, 2020

Recessions in Oregon (Graph of the Week)

This morning the April employment report for Oregon was released. As expected it was catastrophic. Between the revisions to March and the preliminary data for April, Oregon has lost 267,000 jobs (-14%) in the past two months. The unemployment rate spiked to a record 14.2%. Already this is the deepest recession on record in Oregon, with data going back to 1939.

This depressing version of the Graph of the Week compares employment losses in Oregon for each of the past 5 recessions. Tomorrow our office will release the latest economic and revenue quarterly forecast. I have been making similar types of charts in recent weeks based on our forecast and let me tell you something, the official data just hits differently. This chart is even more striking than I expected. It’s not made up, it’s not a forecast, it’s real.

As you can see, the current recession doesn’t look anything like past cycles. The sudden stop in the economy looks more like what happens to economic activity during a labor strike or in the aftermath of a natural disaster. However, unlike in those situations, our office does not expect activity to quickly return to pre-recession levels like it does when the labor strike is resolved or the rebuilding phase kicks in. Stay tuned tomorrow for more on the outlook.

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Posted by: Josh Lehner | May 6, 2020

The Kids were Finally Leaving the Basement…

Oregon’s economy is more volatile than the U.S. for two primary reasons: our industrial structure and migration. Both of these are pro-cyclical meaning they decline or slow further in recessions but grow faster in expansions. Over the entire business cycle, Oregon grows faster than the typical state. A few weeks ago I was originally supposed to be part of a real estate event that was understandably canceled. What follows is some of the research I had been doing that presentation in recent months that touches on young adults, recessions, migration patterns, housing demand and the like.

One socio-economic trend that emerged from the Great Recession was the big increase in young adults living at home. With few job opportunities available they had no choice. Many enrolled in higher education as well. Then once the labor market heated up by the mid-2010s, they were able to find jobs at higher rates, but housing costs were skyrocketing due to the lack of supply. The result was that for the better part of a decade, the share of young adults living at home remained stubbornly high.

However, that was finally starting to change in the past year. It took a lot longer than I expected, but it was happening. The combination of a strong labor market delivering better income gains, plus the increase in new apartment construction beginning to hold down rents meant that young adults could better afford to live on their own again.

Now all of this is up in the air, or rather locked in place I suppose. It’s hard to know exactly how the 2020 recession will impact these trends moving forward. A large part of it will be the duration of the recession and recovery. We know it is very severe at the moment, but that longer trajectory of recovery will be the key factor at play.

Complicating the picture are all the things John Tapogna, President of ECONorthwest, mentioned on Willamette Week’s Distant Voices series the other day. John touched on slower migration, household’s incomes are down and their ability to pay is worse in a recession, households may double up to save money, and the like. All of this puts downward pressure on prices in the near term, at least until the trends reverse once the expansion picks up.

The key here for the medium and long-run outlook is the slowdown in migration. Our office is still working on updating our forecast, but in the past year or two I had already been doing some rough recession modeling and its impact on migration and household formation, at least for Eugene and Portland. What follows is a rift off of that work.

Right now, given the shelter in place style policies all around the country, nobody is moving. This is happening during the spring listing season. Should these policies remain in place — either officially or enforced via social norms — through the entire summer moving months, then migration for 2020 will likely be the smallest we have seen since Oregon lost population during the early 1980s.

Even so, we know migration slows in recessions. Oregon will see fewer people move here this year and next than we thought prior to the recession. This will have knock-on effects in terms of labor supply in the years ahead and lower levels of consumer demand for restaurants, housing and the like. Some rough projections indicate that we may lose the equivalent of 1-2 years of population growth as a result of the recession, not all of which will be made up when the expansion hits full swing further down the line.

Note: Our office will have an updated population forecast in two weeks, these figures are back of the envelope work I had been doing. Also the chart below includes ALL 20-34 year olds in the Portland region, it is labeled apartment demographics given the vast majority of people in this age range are renters.

Finally, I updated our look at migration patterns across the country among young college grads. See our office’s previous report and state comparison for more background. This topic is extremely important when it comes to future economic growth. Oregon’s ability to attract and retain young, working-age households is a huge economic advantage. Coming out the other side of this, following migration patterns will be a key thing to watch. That said, given how much the world has changed in recent weeks, I won’t dig into the details here given we are dealing with dated data. I will just note two things.

Among large metros across the country, Portland remained a top migration destination for young college graduates. This goes for all types of graduates including those with scientific, technical, or medical degrees. In fact, migration has been a bit stronger in Portland in recent years among this latter group. This continues to be good news when it comes to the technical skills of Oregon’s workforce, and for those with such concerns, however overblown they may be.

On the other hand, Portland’s relative position has fallen somewhat in recent years. No longer were migration patterns to Portland significantly outpacing the rest of the country, they were merely leading the pack in the latest Census data. This is still an enviable position. It still indicates stronger long-run growth. But it is certainly worth monitoring moving forward largely because people move for two primary reasons: jobs and housing. If workers cannot find a suitable job opportunity nor afford to move here, then longer-run growth would be lowered as a result.

Bottom Line: In the very near term, shelter in place style policies mean hardly any migration. This goes for both long distance moves into or out of the region but also moving, buying, or selling withing the state as well. Over the medium term, migration slows in recessions but then picks up in expansions. Household formation rates and housing demand follow suit. Over the long run, our office believes Oregon’s ability to attract and retain households in their root-setting years will remain intact, until proven otherwise. The keys to watch will be job opportunities and housing availability and affordability, all of which will show up in these migration patterns of 20- and 30-somethings in the years ahead.

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Posted by: Josh Lehner | May 1, 2020

COVID-19: Industry Impacts

The Oregon Employment Department has been doing a good job every week publishing the latest data and providing insights into who is applying for unemployment insurance. As seen in the chart below, the first wave of initial claims from the COVID-19 recession is thankfully dissipating. However the level of claims remains significantly high by historical standards and the cumulative totals are staggering. In the past 6 weeks, Oregon has seen nearly 340,000 more initial claims than would have been expected in a strong economy.

We’ve also been able to learn a great deal about who is filing these claims in terms of their age, industry, occupation, educational attainment, county and the like. As I’ll get to in a minute, this has been quite helpful in terms of helping our office think through this initial shock to the economy. But before we get to that I would recommend reading OED’s Damon Runberg’s, insightful look at these characteristics, or watch the tag team presentation Damon and I did last week. Additionally I just wanted to add another lens to look at the data: the ability to work from home.

The next chart combines three things. First, the occupation of Oregonians filing initial claims (y-axis). Second, new research from economists out of the University of Chicago on the potential of working from home by occupation based upon the tasks they perform and how much interaction they need to have with clients or customers (x-axis). Third, job polarization research and the breakdown between low-, middle-, and high-wage occupations (color of bubbles).

As expected you see that lower wage occupation in food preparation and personal care lack the ability to work from home and have seen the largest share of the workforce file for claims. These jobs require performing duties at specific locations for customers coming through the door. Conversely, high-wage jobs can largely be done from home provided there is an internet connection and have seen the smallest share of such workers file initial claims. Middle-wage jobs are a mixed bag on both fronts. Overall the University of Chicago work indicates that about 1 in 3 workers in Oregon have the ability to work from home, at least theoretically. As seen in the Venn diagram yesterday, this 1 in 3 goes for both workers with or without kids.

Finally, we know that our traditional economic data lags by a month and usually more. The first substantial impacts of social distancing on the labor market will show up in the April employment report. For Oregon that report will be released on May 19th, the day before our office’s forecast release on May 20th. In other words it comes too late this cycle to be of any real assistance. We are building the plane as we fly. The characteristics and nature of the initial claims have been quite helpful in clarifying our office’s thinking as we develop the outlook.

I won’t get into hard numbers today — that’s what our actual forecast is for — but I wanted to provide an update on the industry impacts of COVID-19 and our office’s thinking. The table shows the various sectors of the economy and how one may group them based on the severity of the recession. The first column is based on some of the initial thinking about the nature of social distancing a month or so ago. Retail plus leisure and hospitality would take the biggest hits, plus their transportation networks and supply chains. The second column is stepping back today, looking at the data so far and our beliefs about the trajectory of the cycle.

A few things stand out. Even as these categories are graded on a scale and the importance is the relative distinction across sectors, the severity of the recession is worse than many forecasters expected even a few weeks ago. It seems like most national forecasters are still trying to catch up to the reality on the ground. Every update they provide to their outlook is a bit worse than the previous iteration. Time will tell just how severe this initial drop is, and how strong of a rebound we get from pent-up demand once the health situation improves further and social distancing policies begin to lift.

But what I want to focus is the simple fact that the impacts are not contained to just bars, restaurants, nail salons, and the like. Yes, that may have been the tip of the spear. However we are seeing the impacts bleed throughout the entire economy. No sector is left unscathed. This was our office’s biggest concern about the initial line of thinking that emerged. Even today you can still find newly released reports trying to gauge the number of workers at risk due to social distancing policies. We’re more than a month past that stage. That research is no longer helpful. The simple reason why is that the demand shock has been so large that it impacts everything.

Update: A few people have asked about the Government being classified as mild. This is certainly the case right now. Our office is building in declines in the coming fiscal year, some of which are persistent over the entire forecast horizon. It’s not that the public sector won’t be impacted, it’s a matter of degree. The overall recession is severe, but right now the outlook for public sector employment is a bit less than that.

In terms of the outlook, not every sector will follow the same path. Our office is still thinking along the lines of a square root recovery overall, but there are underlying differences. Oh by the way, Fed Chair Powell is thinking along the same lines as seen in his press conference this week (see his remarks at 24:00 in the video, or pg 12 of the transcript).

The rebound in economic activity in the months ahead will likely be concentrated among the consumer service sectors. This includes leisure and hospitality, retail, other services, plus other industries like health care as elective surgeries come back, financial activities as the real estate market picks back up some, and the like.

What likely won’t show the same patterns would be our goods producing industries, which have taken a hit. One reason is the demand shock is still being felt. It takes time for some chain reactions to occur. A loss of income today turns into reducing spending today, yes, but also in the months ahead. In particular, sales of big ticket durable goods — appliances, cars, homes, etc — are very volatile over the business cycle as firms and households can delay such purchases until their income or confidence returns. So even as consumer services will return to growth later this year, it may be reasonable to expect goods producing industries will see losses throughout 2020 before returning to growth a few quarters down the line. At least provided overall economic activity continues to pick up, propping up demand.

If we look further out to the mid- or late-2020s, what changes can we expect to see? That’s a bit harder to answer, obviously, or rather the forecasts have a lot larger error bands around them. We are likely to see some structural losses among our goods producers, retail and so forth. Some of these industries were already on edge and while turning off the lights on the economy is easy, restarting it is not as simple as flipping the switch back on.  Furthermore, I am skeptical that we, as a society, will be going out to eat significantly less in 2025 than we were in 2019, provided the public health situation is under control. As such, it is quite possible that the sectors most impacted by social distancing will return to their old trajectories, or close to it, while it may be these other sectors that bear the brunt of the long-run permanent damage.

In terms of process, our office is nearing completion of the economic outlook and ramping up our focus on translating that into state revenues in the weeks ahead. Stay tuned for our latest thinking ahead of the forecast release on May 20th.

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Posted by: Josh Lehner | April 30, 2020

COVID-19: Forced Savings and Declining Productivity

This morning I have a round-up of the latest economic data and our office’s thinking on the outlook.

First, let’s talk about near-term sources of economic growth. I think most people have a good intuition on this, but our office is working to articulate it better as we develop the upcoming forecast. Much of the initial rebound in growth our office is expecting later this year is due to pent-up demand. The primary driver here is the forced savings we are seeing today. Households — particularly higher-income households — simply cannot spend as much money as they would like, or at least as much as they normally do. Stores and restaurants are shut down, or offer limited services. Even in this time of financial turmoil and stress for millions of workers, the savings rate is skyrocketing overall. To this point, this morning’s data release shows that U.S. incomes dropped 2% in March but spending declined 7.5%. Savings increased considerably.

As the health situation continues to improve, and social distancing restrictions begin to lift, some of this forced savings will be unleashed in the form of pent-up demand. Households will go to stores and out to eat more. Businesses will need to restock inventories, producing positive knock-on effects across the supply chain and the like. However this recovery will be incomplete for two reasons. One is that even as restrictions begin to lift, the threat of the virus remains real. Society will not return to normal. Consumers will remain hesitant, at least until there is a widely available medical treatment. The second reason for an incomplete recovery overall is the amount of permanent damage in the economy. Spending will eventually revert not to the previous level of spending, but to current income (or current permanent income). So as the economic damage mounts, and jobs and incomes remain lower, then the path of consumer spending will also remain lower than believed before the virus hit.

This week also brought our first look at GDP in the first quarter of 2020. As expected, it was ugly. GDP contracted nearly 5% last quarter, on an annualized basis. However we know that January and February were pretty good months and that social distancing really only went into effect in March. So to get such a large decline for the quarter overall, that means the drop in economic activity in March was massive. The full impact will show up in the second quarter data and will set all sorts of bad economic records. That said, as noted above, we do expect pent-up demand to drive growth in the second half of the year.

Now, one item that stood out in the details of the GDP report was the decline in productivity. Economist Ernie Tedeschi posted the following chart on Twitter the other day. Now, productivity declines are bad for economic growth and living standards, particularly over the long run. That said, I wouldn’t harp too much on it today given the circumstances we find ourselves in, even if it remains an issue to watch in the coming quarters.

Image

What the decline in productivity really made me think of is how working from home and schools being closed impact our daily lives. This is something I touched on last week during the presentation for the Bend Chamber of Commerce. The following Venn diagram below is an updated and simplified version of one shown here on the site previously. While social distancing impacts us, it does vary based upon our life circumstances like our line of work, our family situation, and the like. We are all trying to figure this out as we go.

Stay tuned. Tomorrow I will have an update on our office’s thinking of the industry impacts of COVID-19.

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Posted by: Josh Lehner | April 27, 2020

Video: COVID-19’s Impact on Oregon’s Economy

Our office has fielded a lot of requests in recent weeks for our thoughts on the economic outlook and what it means for the state budget. After all, that is our job. We have been happy to discuss some things in the big picture perspective, just like we do here on the blog. However we have not publicly discussed any specifics regarding the outlook nor how it translates into state revenues and impacts the budget. These types of requests we have pushed off until after May 20th when we will release the next economic and revenue forecast. This is in part because the forecast is still being developed. Our office has not finalized anything yet and are meeting with our advisors again this week and next. Once we do finalize the outlook, we first let policymakers know and then discuss and upload the details behind it.

With all of that said, last Friday, I had the opportunity to tag team a presentation with Damon Runberg, regional economist for the Oregon Employment Department, for the Bend Chamber of Commerce. Damon has been digging into the characteristics of those filing for unemployment insurance in recent weeks — read his latest article, download the data, or watch his presentation below. I followed his presentation with some thoughts on the nature of the economic shock, the likely shape of the recovery, how federal policies are trying to keep household and firms’ heads above water, and just a couple thoughts on state revenues and the size of current budgetary reserves.

A quick recap and timeline of the video is as follows. Katy Brooks, the Bend Chamber’s CEO starts off with some introductory comments, Damon’s presentation starts at the 4:14 mark and goes through until I come in at 22:28. I go until just past the 39 minute mark, after which time Katy moderates a Q&A portion for the last 20 minutes.

I’m biased, but I thought overall it was a good discussion with lots of information on the current state of the economy, including lots of details on the new unemployment insurance programs and rules, plus some broader thoughts on the outlook. I’d like to thank the Bend Chamber and Damon for inviting me.

Click here to download a copy of my slides: Bend Chamber Lehner Wide 042420

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Posted in Employment

Posted by: Josh Lehner | April 20, 2020

COVID-19: Staying Home and Driving Less

Our friends over at the Oregon Department of Transportation have been busy. They are crunching numbers and writing reports on how COVID-19 is impacting traffic patterns, driving behavior, associated tax revenues, and the like. What follows is a quick summary of their latest reports and links to follow along as they publish updates.

First, a new report, written by Becky Knudson, tracks traffic volumes at 38 points along the state’s highway corridors. This includes spots along I-5, I-84, I-205, I-405, US-97, US-197, US-20, US-26, US-30, US-395, OR-18, OR-22 and US-101. As you might expect, traffic is down considerably in recent weeks. Looking at all the data, Oregonians are driving 40% less than a year ago. What I found interesting after digging into the numbers is that these declines are basically uniform across the entire state. Driving is down significantly everywhere. You can find weekly COVID-19 traffic reports here.

These declines in driving behavior basically translate one for one into reduced sales for motor fuels and gas taxes, which brings us to report number two, the latest ODOT transportation revenue forecast, developed by Dan Porter and Sata Torosyan. As forecasters, our office feels for Dan and Sata who did much of the development and building of the forecast in late February and early March, or right as COVID-19 really began escalating here in the U.S. As such there was no real data on the impacts of the virus, and macroeconomic forecasters more generally had yet to come to grips with the situation either. That said, they were able to build in some preliminary impacts, including the 40% reduction in driving and forecasting a drop in new vehicle sales. To their credit they also committed to updating the outlook in a few months once the hard data starts to roll in, you can find that update here when it is available.

While they may have found themselves in no man’s land in terms of the timing of the forecast, they did a great job in the report walking you through the potential impacts of COVID-19 on the various ODOT revenue sources, from gas taxes to DMV transactions to weight-mile and so forth. I want to highlight the report’s summary of trucking activity, as it clearly lays out what we have gone through in recent weeks but also where we are headed:

Initially we expect an increase in activity as households build inventories, which increase freight traffic to grocery stores and distribution centers. Also, there is some substitution between restaurants and grocery stores and between box retail and online retail. However, the substitution effect is likely not perfect, and after this initial stock piling is exhausted, coupled with more and more people losing their jobs, consumer spending will decline and overall trucking activity will follow.

I think the stockpiling/pandemic shopping/inventory building portion is well understood. We all have done it ourselves. However it’s the last part that I’m not sure is fully incorporated into the conventional wisdom yet. The demand shock is still reverberating and economic activity is falling. Yes, some of the spending declines are mandated. High-income households in particular are experiencing forced savings today — they cannot spend as much as they would like. However, spending will continue to fall, or at least be weak due to the recession and job and income losses. Even grocery store sales today have come back down to earth as the stockpiling portion is over.

Additionally, the forecast mentions that low oil prices will support a faster rebound in motor fuel sales, everything else being equal, when social distancing restrictions begin to lift. This is particularly timely today given the current low prices and oil futures that are even trading at negative prices!

Finally, along with reduced traffic volumes, we do see things like increased driving speeds, less congestion, fewer car crashes and the like. The table below shows that driving speeds in the Portland region are at or near posted speed limits today, even during rush hour. The following graph shows the steep drop in car crashes this year (dark blue) compared with last year (light blue).

As an aside: our advisors mentioned that these are the outcomes you would expect when demand is restricted, although today demand is forced lower via a pandemic and social distancing, whereas normally this discussion surrounds tolls and getting the prices and incentives properly aligned, but I digress.

Note that the last chart on crashes comes from a different set of new, weekly reports from ODOT that includes lots of detailed information on volumes, crashes, travel times and the like across different segments of the Portland region’s highway system (I-5 northbound, OR-217, etc). For example travel times are down 50-60% at the Wilsonville reader board.

All told, these new reports from ODOT confirm what we would expect. Social distancing measures are designed to suppress the spread of the virus. They only work insofar as Oregonians follow both the spirit and letter of the policies. Thanks to the good work ODOT is doing reporting their data, it does look like Oregonians are holding up their end of the bargain to date.

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